International Currencies and Capital Allocation

We establish that global portfolios are driven by an often neglected aspect: the currency of denomination of assets. Using a dataset of $27 trillion in security-level investment positions, we demonstrate that investor holdings are biased toward their own currencies to such an extent that each country holds the bulk of all securities denominated in their own currency, even those issued by foreign borrowers in developed countries. In fact, given the currency of a security, knowledge of the issuer’s nationality adds very little information about the holder’s nationality. While large firms can issue in foreign currency and borrow from foreigners, the vast majority of firms issue only in local currency and do not access foreign capital. These patterns hold broadly across countries with the exception of international currency issuers such as the US. The global willingness to hold the US dollar, an international currency bias, means that even small US firms that borrow exclusively in dollars have little difficulty borrowing from abroad. Global portfolios shifted sharply away from the euro and toward the dollar starting with the 2008 financial crisis, further cementing the dollar’s international role and amplifying the benefit that its status brings to the US. We rationalize these findings in a framework with downward-sloping demand for bonds in each currency in which firms pay a fixed cost to borrow in foreign currency.